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Irish Economy Shrinks 1.6% as Consumer Spending, Investment, Exports Drop

Ireland’s economy shrank the most in a year in the fourth quarter of 2010 as rising unemployment curtailed consumer spending and investment and exports declined.

Gross domestic product fell 1.6 percent from the previous three months, when it increased 0.6 percent, the Central Statistics Office said in a report published in Dublin today. Consumer spending declined 0.4 percent and exports fell 1.4 percent. In 2010, the economy shrank 1 percent, a third annual contraction.

The Fine Gael-led government, which came to power after an election last month, wants to revive the economy after a slump that sent the budget deficit soaring and brought the banking system close to collapse. Ireland, which received a bailout last year after bank-rescue costs soared, is awaiting the results of stress tests to determine how much more capital lenders need.

“The road to recovery for the Irish economy is set to be a bumpy one,” said Lynsey Clemenger, an economist at Ulster Bank in Dublin. “While we continue to expect exports will provide a platform on which the Irish recovery process can build, overall prospects are importantly affected by the ongoing fiscal retrenchment.”

Ireland agreed a four-year budget-cut program in return for the aid from the European Union and the International Monetary Fund in November. EU leaders meet in Brussels today to sign off on measures to resolve Europe’s debt crisis as pressure mounts after Portugal’s fiscal plan was defeated in parliament and Prime Minister Jose Socrates offered to resign.

Bond Yields

The yield premium on Portugal’s 10-year debt over German bunds rose to 443 basis points today from 439 basis points yesterday. The premium on Irish 10-year debt increased to as high as 698 basis points, a euro-era record, before easing to 672 basis points.

The Irish data showed imports slipped 0.1 percent in the fourth quarter from the previous three months, while investment dropped 2.3 percent and government spending rose 0.3 percent. Inventories also acted as a drag on the economy in the quarter. From a year earlier, GDP fell 0.7 percent.

Based on gross national product, Ireland’s economy shrank 2.1 percent in 2010 after a 10.7 percent drop in 2009.

On a year-on-year basis, exports rose 10.6 percent in the fourth quarter after a 13.5 percent increase in the third quarter. In a separate report, the statistics office said the current account surplus widened to 1.4 billion euros in the fourth quarter from 255 million euros.

“While there was some moderation in the annual rate of growth in both goods and services exports in the quarter, the year-on-year rate in each remains strong,” Clemenger said. Net trade will help the economy to return to “modest positive territory” this year.

To contact the reporters on this story: Colm Heatley in Belfast at cheatley@bloomberg.net; Joe Brennan in Dublin at jbrennan29@bloomberg.net

To contact the editor responsible for this story: Colin Keatinge at ckeatinge@bloomberg.net

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